Competition, Regulation and Managerial Incentives

Gianni De Fraja () and Elisabetta Iossa ()

No 1079, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines the effects of a competitive fringe on a regulated firm. Using Hart's (1983) model, we show that competition weakens the managerial incentives for cost reduction: when there is correlation between the cost levels of the firms in the industry, costs are higher in the regulated firm than when costs are independent. We also show that incentives are further weakened by an increase in the number of firms. Moreover, under analogous circumstances the regulated firm shows higher costs than private managerial firms. We end our paper by drawing a potentially important conclusion on the design of regulatory mechanisms: we show that there might be considerable gains (in terms of both lower prices and managerial incentives for cost reduction) if the regulatory target is set in terms of output, rather than price. In this case the presence of competition determines a reduction in slack.

Keywords: Commitment; Entry; Regulation (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Date: 1994-12

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP1079.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Competition, Regulation and Managerial Incentives
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:1079

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP1079.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().